This summer, millions of students will sit down with their families to figure out how to pay for college. They will unwittingly enter into a financial lending system that is badly broken — and not benefiting them as intended.
However, if Congress and President Barack Obama are successful, this system is about to undergo a major change.
The college financing system that was supposed to ensure all students access to college is dangerously out of control, for three reasons.
First, tuition has skyrocketed and shows no signs of abating.
Second, the roller-coaster credit markets have put the federally guaranteed student loan program, which for years has originated almost three-quarters of all federal college loans, on life support.
And third, Pell Grants and other aid that a generation ago offered students about half of their tuition costs today cover only about 30 percent.
Over the past three years, the Democratic Congress has made great progress in restoring the scholarship’s purchasing power by increasing it by $1,500. But we’ve got to build on this success if we’re serious about reversing this trend for good.
The student loan market is changing quickly. Even a year ago, families could have confidence that lower-cost federal student loans, whether provided through the government or a private lender, were dependable. Today, it’s a very different story.
Taxpayers pay private companies to make loans, reimburse them if borrowers default and now even fund an emergency mechanism enacted last year to keep them afloat during the credit crisis. In short, taxpayers are pumping billions of dollars into a system that gives lenders all the rewards but none of the risks.
There is good reason that college affordability, next to health care and energy, is one of Obama’s top three domestic priorities.
We must fix this broken system — or risk jeopardizing the educational future of American families and our nation’s competitive future.
Our choice is clear: We can continue funneling taxpayer dollars through boardrooms, or we can start sending them directly to dorm rooms.
Today, after vigorous discussions with all key stakeholders, I am unveiling legislation to create a reliable, affordable and high-quality federal student-aid program that will revive the essential opportunity of a college education for all Americans.
This legislation will meet two crucial goals at once. It will help more students graduate with less debt by dramatically increasing grant aid and stabilizing student loans. And it will do this without costing taxpayers a dime: a pay-as-you-go college aid transformation.
First, this legislation will build on our commitment to strengthening the Pell Grant for low-income students. It will boost the maximum annual scholarship from $5,500 to $6,900 by 2019 by linking it to cost-of-living increases.
Second, it will keep interest rates down on loans for middle-class students. In 2012, interest rates on subsidized federal student loans will increase from 3.4 percent to 6.8 percent. This bill will make these interest rates variable starting that year, keeping them low and affordable.
Third, it will pay for these investments and insulate all federal student loans from market swings by originating all new loans, starting in 2010, through a more stable option: the Direct Loan Program. Direct lending provides students with the same low-cost loans as lenders but at a fraction of the cost — and without the conflicts of interest that entangled lenders in recent years.
This simple change will save taxpayers almost $90 billion over 10 years, according to the Congressional Budget Office. The result will be a more dependable, efficient and cost-effective program for families and taxpayers.
Fourth, this bill will upgrade customer services for all federal loan borrowers. Rather than force private industry out of the system, we will forge a new public-private partnership that maintains jobs and provides all borrowers with high-quality services when repaying loans. It will establish a competitive bidding process, allowing lenders and nonprofits to keep doing what they do best: service loans. We’ll harness private-sector innovation for the public good.
Fifth, this legislation will deliver on new initiatives Obama has proposed to prepare students to compete in the jobs of the future. This includes making a game-changing $10 billion investment to turn our community colleges into job training and education vessels that will help drive a strong economic recovery.
Finally, this bill will help build a sound fiscal future for our children by also returning $10 billion to pay down our deficit.
All parents hope their children can receive the best education possible without being crippled by debt. To do this, we must transform our financial aid system from one that benefits banks over students into one that makes paying for college a better deal for families and taxpayers.